Micro Economic Analysis

Added on - 14 Nov 2019

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Micro Economic AnalysisMicro Economic Analysis is very useful in making decision. Thispaper gives various examples of micro economic concepts usedin business and government. These tools are useful formanagers as well as policy makers.
Micro Economic AnalysisContentsTable of Figures................................................................................................................................2Part A Case study.............................................................................................................................4Case 1...........................................................................................................................................4a)Business Cycles..................................................................................................................4b)Causes of Recession..........................................................................................................6Case 2...........................................................................................................................................8Part B.............................................................................................................................................111.U Shaped Cost Curves.........................................................................................................112.Elasticity of Demand...........................................................................................................15a) Price Elasticity of Demand....................................................................................................17b.1) Cross Elasticity of Demand..............................................................................................19b.2) Income elasticity of demand...........................................................................................20Part C..............................................................................................................................................23a)Barriers to Entry..................................................................................................................23b)Consumer Exploitation.......................................................................................................23c)Government Intervention...................................................................................................24Table of FiguresDiagram 1 Business Cycles...........................................................................................................................6Diagram 2 Demand Side Illustration of Recession and Expansion..............................................................8Diagram 3 Market Indifference Curve.........................................................................................................9Diagram 4Marginal Product of Labour.....................................................................................................12Diagram 5 Several Short Run Average Total Cost Curves are possible in the Long Run14Diagram 6 Long Run Average Total Costs for Various Plant Sizes..............................................................15Diagram 7 Price Elasticity of Demand........................................................................................................19Diagram 8 : The Kinked Demand curve for Non Collusive Oligopoly.........................................................23Diagram 9 Demand Curve in a Non Collusive Oligopoly............................................................................24Diagram 10 Oligopoly and Joint Profit Maximization................................................................................262
Micro Economic AnalysisYTable 1 Pay-off Matrix in case of games..........................................................................................9Table 2 An Illustration of Income Elasticity of Demand with examples........................................193
Micro Economic AnalysisPart A Case studyCase 1a)Business Cyclesa.1) IntroductionBusiness cycles are economy wide fluctuations in the total national output, income andemployment. Each cycle typically lasts for a duration between 2 to 10 years and is marked bywidespread expansion or contraction of most sectors of the economy.[ CITATION Pau04 \l 1033 ]Typically, a business cycle would have the following phases : recession and expansion and thechanges in the cycles are marked by peaks or troughs.a2) Recession or Contraction PhaseIn this phase, the economic growth slows down. This phase starts after the peak point or thehighest point of the economy has been hit and the economy turns downward.[ CITATION Cha09 \l 1033 ]During the first phase where the demand starts to fluctuate and the demand starts tocontract. This contraction could be due to external shocks or the multiplier effects ofhigher taxes or tight money policies. This phase is known as a recession or contractionperiod in the economy. In this phase, consumer purchases decline sharply whilebusiness inventories increase sharply. This is especially true of consumer durables andgoods like automobiles.In such a situation, businesses /firms react by curbing production in the economy andthe real Gross Domestic Product or Real Output falls sharply. The shrinking of demandhas a acceleration effect. Business profits decline sharply as inventories begin toincrease.[ CITATION Pau04 \l 1033 ]4
Micro Economic Analysisa3) . DepressionA depression is officially hit when the GDP growth becomes negative i.e the output starts fallingand is no longer just growing slowly. The economy hits a trough.[ CITATION Cha09 \l 1033 ]As this period continues, the business investment in plant and equipment also fallssharply. The demand for labour falls as this trend continues. The demand for rawmaterial begins to decline and the prices of commodities tumble.The fall in demand I s first seen by a change in demand for the number of hours put inby labour and then, in the form of increased unemployment. Wages and prices ofservices may stop growing and in some cases, may decline.Inflation slows down as there is a fall in the output. In anticipation of low earnings stockprices begin to decline as investors begin to sniff downturn.As the demand for credit falls, interest rates fall drastically.[ CITATION Pau04 \l 1033 ]a4) Expansion PhaseAn expansion phase officially begins after the economy recovers from the lowest point sinceaggregate demand cannot be zero.The decline in interest rates may spur investment in plant and equipment. Asinvestment increases, the demand for labour increases. This is seen by a decrease inunemployment.As unemployment decreases, the aggregate demand in the economy tends to increase,which in turn increases the inflation in the economy and decreases the build-up ofinventory of goods and services in the economy. This is the multiplier effect.a5) Boom PhaseAs aggregate demand increases, the investment demand also increases. New spendinghas a multiplier effect as there is more spending in the economy.Factory output begins to increase due to increased demand and decreased inventories.This has an acceleration effect and hence, employment as well demand for money5
Micro Economic Analysisincrease. As demand for money increases, the rates of interest also increase.[ CITATIONPau04 \l 1033 ]This is a period of high employment, high inflation.[ CITATION Cha09 \l1033 ][ CITATION Pau04 \l 1033 ]Diagram Business Cycles Source:[ CITATION Pau04 \l 1033 ]b)Causes of RecessionThe Aggregate Demand began to decline suddenly in economy ABC. The main causes couldhave been exogenous or endogenous.Exogenous factors refer to external factors that may have caused the recessions. Forexample, an oil shock, a war , gold rush etc.Endogenous factors refer to the mechanism within the economy that may have caused therecession.[ CITATION Pau04 \l 1033 ]Endogenous factors could be related to the supply side of6
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